TAX TIP – Circumstances when market value should be considered
It should be noted that CGT event K4 will be triggered if a taxpayer elects to value land they commence to hold as trading stock at market value. Where CGT event K4 occurs, a capital gain will arise if the market value exceeds the cost base of the land. A capital loss will arise if the market value is less than the reduced cost base. Refer to S.104-220.
Even if the market value of the land exceeds its cost, the taxpayer should consider electing to bring the land into trading stock at market value in certain circumstances, even though this triggers CGT event K4. For example, this may be useful where the land is a pre-CGT asset (in this case, the increase in the value of the land will not be taxed) or the land is post-CGT and the taxpayer is able to access the 50% general CGT discount and/or the CGT SBCs.
Developer ceases to hold property as trading stock
Tax consequences arise where a property developer ceases to hold land as trading stock, but still owns it. For example, a property developer may hold a property as trading stock (i.e., for resale) but decides instead to retain it for their own private purposes or to rent it out.
In these circumstances, S.70-110 will apply to treat the taxpayer as having sold the property just before it ceased to be trading stock, at arm’s length and in the ordinary course of business, for cost, and as having immediately bought it back for the same amount. Therefore, the developer is assessed on the cost of the property at the time it stops being held as trading stock (the taxpayer will also effectively receive a deduction through the decrease in trading stock on hand).
For CGT purposes, the taxpayer is taken to have acquired the property at cost at the time it stops being held as trading stock. Refer to S.112-97, S.109-60 and to S.70-110(1)(b).
If the taxpayer uses the retained property for income-producing purposes (e.g., to derive rent), they will generally be entitled to deduct any expenses incurred in respect of that purpose. In relation to this issue, note that the ATO released ATO ID 2014/8 to clarify whether the Division 43 write-off is available where a developer decides to keep a property they originally constructed for sale and held as trading stock.
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